What it means
The calculation could not be simpler: take the number of advancing issues on an exchange or index and divide it by the number of declining issues. Exchanges publish both counts after every session, so the ratio needs no modelling and no assumptions.
Analysts usually quote it alongside the index move, because the two together tell a fuller story than either alone. Breadth matters because a market index is weighted, normally by company size, so a few very large shares can drag an index higher while most of the market is quietly falling.
When an index rises 1% on an A/D ratio of 0.6, the rally is narrow and depends on a small group of names. When the same 1% comes with a ratio of 2.5, buying is spread across the market, which analysts read as a healthier advance.
In practice the ratio is used in three ways. It confirms or questions an index move on the day, it is smoothed over 5 or 10 sessions to filter out noise, and extreme readings are watched as possible signs that a market is temporarily overbought or oversold.
Professional users rarely act on a single day's figure, because one heavy session can distort it. A few technical details change the answer.
Shares that close unchanged are normally excluded rather than counted on either side, so a quiet day can produce an odd-looking ratio from a small number of moving shares, and the result depends entirely on which universe of shares is used. The ratio for a broad exchange listing thousands of companies behaves differently from the ratio for an index of 30 blue chips.
The ratio should not be confused with the advance/decline line, which adds the daily difference between advances and declines to a running total and is plotted as a trend. The ratio is a snapshot; the line is a cumulative picture.
One more point of confusion is the abbreviation itself, since ADR much more commonly stands for American Depositary Receipt in everyday finance conversation.
In practice
Real-world examples.
Example
An asset manager writes a daily market note for clients. The headline index gains 0.8%, but the A/D ratio comes in at 0.55, so the note explains that the gain came almost entirely from two large technology companies while most of the market fell. Clients holding diversified portfolios understand why their valuations did not move with the index.
Example
A corporate treasurer is planning a secondary share issue and wants to avoid a narrow, fragile market. Her adviser shows that the ten-day A/D ratio has been above 1.4 for three weeks, indicating broad participation, and the issue is launched into that window. The placing is completed at a discount of only 3% to the market price.
Example
A financial adviser is asked by a retired client why a rally feels like it is not helping her income-focused holdings. He pulls the A/D ratio for the previous month, shows an average reading of 0.8 against a rising index, and explains that breadth has been negative while a few index heavyweights carried the market.
Formula
Calculation
A/D ratio = number of advancing issues / number of declining issues.
Suppose that on one session an exchange reports 1,950 advancing issues, 780 declining issues and 120 issues unchanged.
A/D ratio = 1,950 / 780 = 2.5.
The reading of 2.5 means two and a half shares rose for every one that fell, which is a broad advance. Unchanged issues are left out of the calculation entirely.
To smooth the figure over ten sessions, total the advances and declines across those sessions. If the ten-day totals are 14,400 advances and 9,600 declines, the ten-day A/D ratio = 14,400 / 9,600 = 1.5, which describes a steady rather than a dramatic uptrend.Case study
Seen in the real world.
Brackenhill Asset Management is a fictional firm invented for this illustrative case. It ran a mid-sized equity fund and had a house rule that new positions would only be added when market breadth supported the index trend.
Over one quarter the main index rose by 6%, which looked like an obvious signal to put cash to work. Brackenhill's investment committee noticed that the ten-day A/D ratio had averaged 0.7 throughout the rise, so fewer shares were rising than falling even as the index climbed. The committee kept the fund's cash weighting at 12% instead of the 4% the index trend alone would have justified.
In this illustrative story the narrow rally reversed, and the fund's cash allowed it to buy into the subsequent fall. The committee was careful to record that breadth had informed the decision rather than predicted the reversal, since a single indicator is never the whole case.
Watch out
Common mistakes.
- Treating the A/D ratio as a prediction rather than a description of how widely the day's move was shared.
- Confusing the ratio with the advance/decline line, which is a cumulative running total and behaves quite differently on a chart.
- Comparing readings calculated on different universes of shares, such as a whole exchange against a narrow blue chip index, as if the numbers meant the same thing.
Questions
People also ask.
What is a normal reading?
Anything close to one is unremarkable, readings above two reflect a broad advance and readings below half reflect broad selling, though the typical range differs by market.
Does ADR here mean American Depositary Receipt?
No, in this context ADR is the advance/decline ratio, which is one of the most common abbreviation clashes in finance.
Can the ratio be used on a single company?
No, it only has meaning for a group of shares, because it counts how many separate issues rose against how many fell.
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